A parent who cosigned a student loan for a child cannot separately classify the loan and pay it in full under a chapter 13 plan, according to Bankruptcy Judge David M. Warren of Raleigh, North Carolina.
Before filing, the debtor-mother cosigned a 12%, $15,000 student loan to finance her daughter’s freshman year in college. Interest payments are deferred until the daughter graduates in 2021, but more than $8,000 in interest will have accrued when payments come due.
In her plan, the mother proposed to classify the student loan separately and pay it in full over the course of her five-year commitment period. If the separate classification were permitted, other unsecured creditors would recover 13%. If the student loan were not separately classified, the recovery for unsecured creditors would rise to 25%, Judge Warren said, because more disposable income would be devoted to the unsecured class.
The chapter 13 trustee objected to separate classification. Judge Warren sustained the objection in his September 26 opinion.
The case turned on Section 1322(b)(1), which allows debtors to “designate” a class of unsecured claims, but the plan “may not discriminate unfairly against any class so designated; however, such plan may treat claims for a consumer debt of the debtor if an individual is liable on such consumer debt with the debtor differently than other unsecured claims.”
Judge Warren said that some courts have interpreted the “however” clause as creating a carveout automatically permitting favored treatment of consumer debts that were cosigned by another individual.
Judge Warren rejected the idea of an automatic carveout, based in part on his interpretation of the legislative history of a bill in 1983 that was not adopted by Congress until later. He then launched into an analysis of whether the debtor would have a legitimate, moral obligation to repay the cosigned loan. He quoted another judge who had said there is no moral obligation to repay a cosigned loan in full if no help was given to the debtor.
Even though the debtor and the daughter were both primarily liable for the loan, Judge Warren said that the daughter was the “primary beneficiary” because the loan was used to pay for her education. He went on to say that the mother received no “tangible and measurable benefit.”
Absent tangible and measurable benefit, Judge Warren said that separate classification was “inappropriate and cannot survive confirmation.”
Judge Warren buttressed his conclusion by the fact that the loan would not be in default absent payment by the mother, because repayment will be in deferment until 2021. When payments come due, he said that the daughter “presumably” will be able to cover the payments.
The deferment status of the loan, Judge Warren said, “further persuades the court that separate classification of the Claim is inappropriate” and “is not indicative of a good faith attempt to repay creditors.”
Observations
Judge Warren saw no tangible benefit to the debtor-mother.
The legislative history to which the judge referred gave moral obligation as a reason for allowing a debtor to provide a larger payment and thus benefit an individual who is a co-obligor. So, does a parent have a moral obligation to afford her daughter an education?
Beyond the notion of moral obligation, can there be tangible benefit?
Fewer people today are able to pay for a child’s college education out of current income. What if the debtor showed that she could not have sent her daughter to college without the loan, and what if the debtor proved that she would not have qualified for an ordinary unsecured loan of similar duration and on similarly beneficial terms?
A parent who cosigned a student loan for a child cannot separately classify the loan and pay it in full under a chapter 13 plan, according to Bankruptcy Judge David M. Warren of Raleigh, North Carolina.
Before filing, the debtor-mother cosigned a 12%, $15,000 student loan to finance her daughter’s freshman year in college. Interest payments are deferred until the daughter graduates in 2021, but more than $8,000 in interest will have accrued when payments come due.
In her plan, the mother proposed to classify the student loan separately and pay it in full over the course of her five-year commitment period. If the separate classification were permitted, other unsecured creditors would recover 13%. If the student loan were not separately classified, the recovery for unsecured creditors would rise to 25%, Judge Warren said, because more disposable income would be devoted to the unsecured class.
The chapter 13 trustee objected to separate classification. Judge Warren sustained the objection in his September 26 opinion.
The case turned on Section 1322(b)(1), which allows debtors to “designate” a class of unsecured claims, but the plan “may not discriminate unfairly against any class so designated; however, such plan may treat claims for a consumer debt of the debtor if an individual is liable on such consumer debt with the debtor differently than other unsecured claims.”